Numerous expansions may spur consolidation, says official

Grain handling companies that hope to establish a beachhead in Western Canada could face a steep learning curve, particularly if they don’t have reliable port access arrangements, say industry executives.

“I think there will be a difficult learning curve for some of the new entrants,” said Shane Paterson, corporate development officer with Paterson Global Foods.

“It’s one thing to have a facility that allows you to buy grain on the Prairies, but unless you can get it to market, you’re not going to be making a business out of it.”

Billions of dollars have been invested in the western Canadian grain handling industry over the past three or four years, including new construction projects and upgrades to existing facilities.

Paterson described the industry as highly competitive and already capable of handling prairie production.

A handful of established grain companies also control the vast majority of capacity at export terminals, which could leave new elevator companies in a precarious position.

“It’s a tough equation,” Paterson said.

“Is there enough port capacity in Vancouver? I think the answer is yes. But those who control port facilities will control the margins of any newcomers.”

Paterson said some new investors might be inclined to reassess their investments now that Canadian grain handling margins have returned to more normal levels.

“What I expect we’ll see in the near future is that some of the ambitious projects that … new players have made us aware of may not come to fruition as investors try to reconcile the outlay of cash with the new … margins,” he said.

Darwin Sobkow, executive vice-president of agribusiness operations and processing at Richardson International, agreed that investors that have plans to build new facilities will need to take a close look at volumes, margins and markets.

Smaller operators that have assured sales might be working with different margins than large bulk exporters.

Nonetheless, some of the proposed elevator construction projects that have been announced recently came as a surprise to Richardson, one of Canada’s most experienced grain handling companies.

“For us it was surprising,” Sobkow said. “We looked at a lot of the markets where these people are building … and we could not show a return that would justify the investment.”

The investments aren’t small.

“You’re probably talking in the $35 to $45 million range to build one concrete elevator, and today, the existing infrastructure is handling the crop.”

Sobkow conceded that significant increases in production or export volumes would change the economics of building and operating a new elevator.

“I don’t know what the environment will look like in five or 10 or 15 years,’ he said.

“But from our standpoint, (some of the new projects) would be very hard to justify.”

Sobkow said the current phase of investment could be followed by another round of consolidation.

“A lot of these areas (in Western Canada) are getting pretty overbuilt,” Sobkow said.

“As people find that they’re not meeting their expected volume-margin thresholds, it will inevitably lead to consolidation.”

Paterson said some new entrants might be able to survive, but they will likely be niche suppliers.

“Some smaller operators … are able to make a living … but for them to become a major player, it’s going to take a lot more than one or two high-throughput elevators.”

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